Monday, October 6, 2008

State of the Market - 10/6/08

Another awful day for Wall Street, as the negative reaction to the great bailout plan from Washington carried over early from Friday's trading. Stocks gapped lower to start and slid lower throughout the first hour or so of trading today. They tried to briefly bounce a little before 11:00, and the selling was a little slower through the lunch hour, but around 2:00 the selling intensified once again and stocks were destroyed even further, with all indices down over 7%. A quick bottom was hit around 3:00, and stocks did bounce quickly from there, but volume was not as climactic as I expected, so I don't know that this will amount to anything or not. We shall see I guess.

I have never went through a full bear market so I have nothing to compare it to, but the selling of the past week or so seems historic and unprecedented to me. It is quite amazing to see stocks that were $80 or $90 only a few weeks ago now be in their mid-teens. I hope to learn from this and profit the next time a major bear market comes up. I have done OK shorting this market through the summer, but I have not been actively involved since the ban on shorting and have missed some major moves lower.

In terms of panic numbers, we continue to be at extreme levels and could turn up at any point. The main Market Map ratio was at 380/2941 around 3:00, and it is getting closer to the under 200 number that signals a possible turning point. Around 3:00, I had 151 stocks down over 50% in a month, which is the highest I have ever seen. The T2108 got down to around 3 in the afternoon - like I said last night, the only time this has been lower was in October of 1987. The VIX broke out of a very short consolidation today in a powerful way and looks poised to move higher. These signals may have reversed somewhat after the late bounce, but nonetheless we are very stretched here or were intraday. I will have to wait until my scans come in to see where these indicators closed.

There are a lot of contrary indicators that I am seeing. I have read and I have written this year that the true turning point in a capitulation bottom is when EVERYONE throws in the towel and just gives up. It is when NO ONE at all wants anything to do with owning stocks. Right now, it seems like we are getting close to that type of atmosphere. I watched Jim Cramer lead off the Today show this morning at 7:00 by telling people they should sell if they needed any of their money in the next five years. Perhaps this is the clearest contrarian indicator of all - when he turns super bearish, perhaps it is time to start being bullish.

All of these continue to point to us reaching a capitulation point soon in this market. It is just hard to tell exactly when that point will be though - that's the problem. As I said this weekend, we could very well put in a meaningful bottom this week, but it might be 20% lower than where we were on Friday. We were well on our way to that after today. I think it is too early to see if today is the reversal we needed however.

We'll have to wait to see if today's late bounce will mean anything. It certainly could, but I just don't know yet. I think if this was a real capitulation, volume would have been much higher than it was, given the gravity of our current situation. I was really hoping for a close at the lows today, followed by a big gap down tomorrow with a reversal midday. I think that scenario would have been better. Who knows, it still may happen as the selling could continue tomorrow.

Right now, there continues to be nothing to do but sit back and watch history unfold. I hope to learn some lessons from this period and pull from them at some point in the future. I am glad I am in cash and will likely remain in cash for the time being, although I am willing to get long if I see the market continue higher on heavier volume or reverse higher after more selling the next few days. Good luck to all Tuesday.

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hayfro said...

I myself have been looking for a selloff into the close and a big gap down the following day to get long, however that pattern may be to common as I think a lot of people are looking for that scenario. The market will probably surprise a lot of people with a new angle, although I'm not quite sure what that is yet.


Mac said...

That's a good point - it might be too obvious for that to happen. I am just trying to get ready in case we do follow-through tomorrow. I still have my doubts that this is it(the bottom), but I know it is possible.